What is the break-even point and how is it calculated?

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Break-even is the level of sales where total revenue exactly covers all costs, so profit is zero. To find it in units, compare revenue and costs per unit: revenue is price per unit times quantity, costs are fixed costs plus variable cost per unit times quantity. Setting them equal and solving for quantity gives Q = Fixed costs / (Price per unit − Variable cost per unit). This is the idea behind using fixed costs divided by the contribution margin per unit. For example, if fixed costs are 1,000, price is 20, and variable cost per unit is 12, the contribution margin per unit is 8, so break-even is 1,000 / 8 = 125 units (which is 2,500 in sales at that price). This differs from just equating fixed costs to revenue (which ignores variable costs), and from a total revenue divided by total costs calculation, which doesn’t yield the quantity needed. Break-even also isn’t where profits are maximized; profits are zero at break-even and rise with higher sales.